Developers Make Foray into Arizona Tribal Lands

Raw land for commercial development in the Phoenix-Scottsdale corridor has become scarce of late. No wonder: Indian reservations comprise nearly one-fourth of all the land in Arizona, with some of those holdings pressing against the state's biggest cities. The reservations were once considered formidable barriers to new construction. But lately, those boundaries have come tumbling down.

Several developers are putting up a mix of retail, office and industrial buildings along the Loop 101 east of Phoenix between Tempe and Scottsdale on land owned by the Salt River Pima-Maricopa Indian Community. The tribe owns 55,000 acres and owns and operates two casinos along Loop 101.

Chicago-based Alter Group has a ground lease on 187 acres of reservation land on the east side of 101 and completed a 142,000 sq. ft. home furnishings design center now mostly leased up. The firm is erecting two speculative office buildings comprising 165,000 sq. ft., and in late July announced a deal with Medicis Pharmaceutical Corp. to construct a new national headquarters in two 150,000 sq. ft. low-rises.

Alter, which is calling its development Riverwalk Arizona, also has plans to put up 700,000 sq. ft. of retail space and is negotiating to build two hotels on its land with a total value of more than $400 million, according to Kurt Rosene, an Alter senior vice president.

On the other side of Loop 101, a partnership called MainSpring Capital Group has tied up 209 acres. In a joint-venture with Opus West, two spec office buildings totaling 232,000 sq. ft. were built late last year and a 145,000 sq. ft. spec building is expected to be ready by early fall. Curtis Brown, a principal with Ross Brown Partners Inc. in Scottsdale who is a partner in MainSpring, figures his group's development will eventually be worth $700 million.

Building on Indian land is a complex process. Developers can't own Indian land; it's available only for lease, for terms of 65 years in the case of the Pima-Maricopa. That makes some banks and tenants nervous, because Indian tribes retain control and might under the right circumstances take back their lands.

Land assemblage is even tougher, developers say. Contrary to perceptions, the tribe doesn't own its reservation land as a collective. There are some 8,000 Indians living on the Salt River reservation, and to gain control of its 187-acre parcel, Alter had to make deals with 200 separate families and secure approval of the lease from the Bureau of Indian Affairs and the tribal council.

“Here you have successful developers coming to poor Indians asking them if it's OK to use their land to make a lot of money,” says Alter's Rosene. Negotiations took five years to complete.

Alter's deal is structured as a combination of rent with escalators tied to consumer prices along with a percentage of net income earned from development. The Pima-Maricopa have devised sophisticated formulas for the leases. “Leaders in the Indian community foresaw encroachment here years ago and they put in zoning regulations and a development process so they'd be ready for this day,” explains William Allison, manager of economic development for the Pima-Maricopa.

More development along the Loop 101 is likely. Market dynamics are favorable, with the metro Phoenix area reporting an 11.6% office vacancy rate. Some 1.8 million sq. ft. was absorbed just in the first half of 2006, according to Larry Downey, a senior director at Cushman & Wakefield in Phoenix. “No question we'll see more development deals on Indian land in the future.”